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Founder, Creditors Differ as to Loki's Future Course

The founder of Linux games publisher Loki Software, Inc., says
he hopes that his company's filing for Chapter 11 bankruptcy
protection will allow it to remain in business.

In an interview, Scott Draeker said that the company had made
some financial mistakes and said that the filing, in federal court
in California August 2, is to keep a lone creditor from "gut[ting]
the company."

Creditors, meanwhile, including former employees who claim that
in some cases they're owed more than a year's wages, disagree as to
whether they want Loki to be liquidated, with the proceeds
distributed among themselves, or kept alive but run by someone
other than Draeker. Companies to whom Loki owes money are said to
favor the former, while former employees are banding together in
hope of bringing about the latter.

The filing came immediately after one creditor, Mark Lance
Colvin, won a judgment of $237,000 against Loki in a proceeding
before the California Labor Board. Colvin, who was fired by Loki
last December, said he had gone largely unpaid for 19 months. In
addition, his lawyer says, Colvin loaned Loki nearly $100,000 via
credit card, including at least one occasion when he charged all or
part of Loki's semi-weekly payroll, which the company has refused
to repay.

Rumors of Loki's financial hard times had been circulating
within the industry for months, and the Chapter 11 filing -- in
which the company seeks protection from creditors while formulating
a plan to stay in business -- was not unexpected. The timing,
agreed Draeker and David J. Harter, Colvin's lawyer, was due to the
judgment awarded Colvin by the California Labor Board following
hearings this spring and early summer.

"We made some mistakes," said Draeker. "We ran up some bills
that we couldn't pay. The last thing you want is for someone to
come in and gut the company and leave the other creditors with
nothing." Loki's debt is said to total more than $1.5 million.

"We will be proposing a plan and we intend it to be fair and
equitable to the creditors and realistic, so the company can go
ahead," Draeker continued.

Colvin, based on a deposition given by Draeker in the matter
July 18, was with the company from May 1, 1999, until Draeker fired
him Jan. 5, 2001, during which time he acted as an employee, a
company officer, an investor, and a lender, apparently enjoying few
if any of the protections normally attendant to those respective
functions. He was paid few times during that period, but purchased
supplies, transportation, and lodging for the company, charging the
items to his credit cards. Colvin maintained that he expected to be
repaid, but Draeker characterized the charges variously as loans,
investments, and contributions to the company. They were not
repaid. On at least one occasion, Colvin claims, he passed his
credit card through Loki's credit card machine in order to give
Loki a cash advance that allowed it to meet its payroll.

During the deposition, Draeker said that he was unaware of
salary checks that he, Draeker, had received and endorsed, and said
that he did not know if the payments had been entered in his income
tax returns. On one occasion, he testified, about $100,000 was
transferred to his account from which $88,000 in payroll, rent, and
other expenses were paid. And on at least one occasion, the company
loaned employees the amount of their net salaries against payment
of those salaries instead of paying the salaries themselves,
producing what may prove to be a thorny payroll tax issue,
depending on whether the "loans" constituted pay or not.

A nonpracticing lawyer, Draeker met Colvin with both were
employed by Apple in the early 1990s.

Loki lost the action brought by Colvin, who was awarded
$237,000.

"There's a stay on the case, because of the bankruptcy," said
Harter in an interview. They will very lileky end up paying only a
small portion of their debts, while my guy will be paying off
credit card debts incurred in behalf of Loki for the next 20
years."

Harter said that Colvin and other debtors are eager to see the
fuller financial disclosure from Loki that will come with the
bankruptcy filing. Draeker said that every penny will be accounted
for, and denied that there had been any improprieties.

"All our financial transactions, lawsuits against the company
and by the company, everything is a matter of public record," said
Draeker. "Let the facts be heard. Let's get this stuff heard. Let's
get the facts out rather than some story told by a disgruntled
employee."

Meanwhile, discussion is underway whereby former employees and
perhaps other creditors would ban together as a class in hope of
becoming the single largest creditor, thereby gaining additional
sway in the disposition of the bankruptcy. While under the law
employees are given preferred treatment in bankruptcies, this is
only up to about $5,000 per employee. At its height, Loki employed
about 20 people; at the time of the July deposition, the number had
dwindled to four. The employees have discussed taking over the
company in hope of turning it around. The reorganizational plan
Draeker's lawyers will file is expected to leave him in
control.

"They're looking into putting in an independent party to run the
company," said Harter, who says his advice would be different. "I
would tell them to form a new company and purchase those products
from bankruptcy." In that way, he said, the new company would be
free of Loki's existing liabilities.

Draeker said that he expects his plan to prevail and for Loki to
remain in business.